WeWork is facing a cash crunch, but partners are likely to bail it

  • WeWork could get a cash crunch as soon as February and possibly even faster.
  • To the extent that the company burned cash during the first half of this year, it does not have enough to last it for another year.
  • But analysts who spoke to Business Insider doubted the company would go out of business.
  • WeWork's new co-CEOs are already selling extraterrestrial businesses and assets, and the company's partners and investors are likely to pony up more cash to help it survive, they said.
  • Read full Business Insiders WeWork coverage here.

With the planned public offer in trouble, WeWork could face a cash crunch in the first half of next year. But real estate experts doubt that the company's partners will let it go out anytime soon.

As it burned through the stash during the first half of this year, that collaborative giant could run out of cash by the end of February. Although we make generous assumptions about how much money it already has access to, WeWork can run out of cash by July until today's incineration rate.

"The business model to date is losing money," said David Erickson, senior fellow in economics at the University of Pennsylvania Wharton School of Business. He continued: "They need a significant amount of capital."

But Erickson and other industry experts expect WeWork to get that capital, either from former investors such as SoftBank, from its lenders like JPMorgan, or from the landlords that WeWork has made tens of billions of dollars in rent payments over the next few years.

"I don't think they are in a liquidity crisis because they have a lot of deep-rooted partners who have a self-interest in WeWork going to 0," said Scott Galloway, a former founding founder of New York University's marketing professor been strongly critical of WeWork's business and planned listing.

WeWork reps did not respond to an email seeking comment.

WeWork's economy is uncertain

The collaborator was not supposed to be in a position where it had little cash.

As recently as three weeks ago, the company marched against an IPO. The offer promised not only billions of dollars in cash from new investors, but also a $ 6 billion line of credit from lenders including JPMorgan. The company looked like it would have enough in the coffins to last for many years to come, even with the huge combustion figures.

Read This : There are 6 billion very good reasons for WeWork to go public this year, even though Wall Street doesn't want it

But the WeWork offer went down shines two weeks ago. In the face of opposition from Wall Street to the offer, WeWork postponed it first, only for the near future. Now, however, following the obliteration of CEO Adam Neumann and the shaking of the management team, the WeWork offer has been delayed to an undetermined future date.

That is a problem, unless the company's lenders change the terms, the company's $ 6 billion line credit is conditional on collecting $ 3 billion in a stock exchange listing by the end of this year. Instead of seeing a fall of $ 9 billion or more with that event, now it can get nothing.

Because of WeWork's abundant cash consumption, the setback has the potential to be more than just a PR-black eye; it could threaten its ability to continue as a continuing business.

At the end of June, WeWork had $ 2.5 billion cash on hand. During the first six months of this year, $ 1[ads1].5 billion in cash burned between operating and investing in real estate and equipment for the office space. At that rate, the company will run out of cash in just over 10 months from June 30 – or sometime in May.

But that could undermine the uncertainty in WeWork's economy. Around $ 536 million of the cash it provides in the balance sheet is actually owned by the partially owned subsidiaries, such as those operating the Chinese and Japanese operations. It is unclear how much cash will be available to WeWork's parent company in the event of a cash crunch. If it failed to tap that cash, it could run out of funds less than eight months from June 30 – or late February.

The company has large rents that are due

And things can be even worse than that for WeWork. The company's operations have consumed relatively little cash in recent years. During the first six months of the year, daily operations burned only $ 199 million of the $ 1.5 billion it consumed in total.

  WeWork Weihai Lu Open Seating Common Area Shanghai

WeWork has entered into leases of tens of millions of square feet of new office in recent years, including for this center in Shanghai.
With permission from WeWork

A large part of the reason why WeWork has been able to postpone much of the outstanding rent. The company has signed lease agreements at a brisk pace in recent years; it allowed around 35 million square feet of office space just since the beginning of 2017. Landlords often give new tenants a discount on the first few years of long-term leases or credits for the improvements they make to them.

The company was able to reduce its cash outflow from operating by deferring rent of $ 1.3 billion in 2018. Due to an accounting change, it did not disclose a similar number in the first half of this year, but it are probably of similar or greater scope.

But the company has some big bills that are due. It owes about $ 869 million on leases for the rest of the year and a further $ 2.2 billion on such leases next year.

WeWork's new co-CEOs are taking steps to raise and save money

To be sure, WeWork's new co-CEO is already in the process of increasing its financial position. They plan to sell some of their non-core businesses and their jet, which it bought for $ 60 million last year. They also plan to cut thousands of jobs and take on new hires.

While such steps are likely to reduce WeWork's cash burn and put more money in the suitcase, they probably won't be enough to stabilize it in the long run, given that it owes $ 47 billion on expiring leases in future years. But the new CEOs could take more dramatic steps, such as moving away from some of these leases.

Most of WeWork & # 39; s leases are owned by so-called special entities, mainly legally independent subsidiaries. In order to preserve cash and protect the corporate superiors, WeWork can default these units on their leases and file them through bankruptcy.

"They can walk away from some of these leases and not cause a breach of business," said Jeff Langbaum, a real estate analyst with Bloomberg Intelligence. "Some people have remedies," he continued, "to keep working."

And if cash still gets cramped, WeWork will probably be able to lean on its partners, and none of them will likely be eager to see it go down. Already SoftBank, which has invested $ 10.65 billion in WeWork and its subsidiaries so far, is reportedly giving it another $ 1 billion to help it up.

WeWork's partners are likely to come to the rescue

SoftBank and WeWork's other investors have a lot at stake in the future, and that will probably spur them to trade, Langbaum said.

"There are probably ways to keep the company afloat," he said.

And WeWork & # 39; s investors are not the only players likely to be motivated to help it. The company is the largest tenant in New York and London. The landlords hardly want to see it as standard on the rents. There is no guarantee that they will be able to turn around and release the sites at the same prices they charged WeWork, Erickson said.

"The landlords – they want WeWork to succeed," he said. He continued: "They are very important for the commercial real estate market."

Erickson actually believes there is a good chance that WeWork & # 39; s largest landlords – which include Beacon Capital Partners, Nuveen Real Estate and Moinian Group, among other real estate companies – will shell out funds to keep the company operating. Each of them can be expected to invest $ 250 million or $ 500 million, he said.

And the big banks may be involved too, he said. Many of these landlords have taken out loans to buy their properties. Should WeWork go out of business, that event could ruin the landlord's ability to repay its loans. So even though certain banks have not lent money to WeWork, their economy can be linked to health anyway.

"It's very important for the commercial real estate market" that WeWork gets new funding, Erickson said. Banks and corporate lenders can save the company, he continued, "just to save their own skin."

Do you have a tip about WeWork or another company? Contact this reporter by email at, message him on Twitter @troywolv or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.

Source link

Back to top button